曼昆微观经济学答案ch17

1、 Chapter17/MonopolisticCompetition Chapter17MonopolisticCompetitionMONOPOLISTICCOMPETITIONWHATSNEWINTHETHIRDEDITION:Anewsummarytablehasbeenaddedthatcomparesmonopolisticcompetitiontomonopolyandperfectcompetition.LEARNINGOBJECTIVES:Bytheendofthischapter,studentsshouldunderstand:competitionamongfirmsth

2、atselldifferentiatedproducts.howtheoutcomesundermonopolisticcompetitionandunderperfectcompetitioncompare.thedesirabilityofoutcomesinmonopolisticallycompetitivemarkets.thedebateovertheeffectsofadvertising.thedebateovertheroleofbrandnames.CONTEXTANDPURPOSE:Chapter17isthefinalchapterinafive-chaptersequ

3、encedealingwithfirmbehaviorandtheorganizationofindustry.Chapters14and15developedthetwoextremeformsofmarketstructurecompetitionandmonopoly.Themarketstructurethatliesbetweencompetitionandmonopolyisknownasimperfectcompetition.Therearetwotypesofimperfectcompetitionoligopoly,whichwasaddressedinthepreviou

4、schapter,andmonopolisticcompetition,whichisthetopicofthecurrentchapter.TheanalysisinthischapterisagainbasedonthecostcurvesdevelopedinChapter13.ThepurposeofChapter17istoaddressmonopolisticcompetitionamarketstructureinwhichmanyfirmssellproductsthataresimilarbutnotidentical.Recall,oligopolydiffersfromp

5、erfectcompetitionbecausethereareonlyafewsellersinthemarket.Monopolisticcompetitiondiffersfromperfectcompetitionbecauseeachofthemanysellersoffersasomewhatdifferentproduct.Asaresult,monopolisticallycompetitivefirmsfaceadownward-slopingdemandcurvewhilecompetitivefirmsfaceahorizontaldemandcurveatthemark

6、etprice.Monopolisticcompetitionisextremelycommon.KEYPOINTS:Amonopolisticallycompetitivemarketischaracterizedbythreeattributes:manyfirms,differentiatedproducts,andfreeentry.Theequilibriuminamonopolisticallycompetitivemarketdiffersfromthatinaperfectlycompetitivemarketintworelatedways.First,eachfirmhas

7、excesscapacity.Thatis,itoperatesonthedownward-slopingportionoftheaverage-total-costcurve.Second,eachfirmchargesapriceabovemarginalcost.Monopolisticcompetitiondoesnothaveallofthedesirablepropertiesofperfectcompetition.Thereisthestandarddeadweightlossofmonopolycausedbythemarkupofpriceovermarginalcost.

8、Inaddition,thenumberoffirms(andthusthevarietyofproducts)canbetoolargeortoosmall.Inpractice,theabilityofpolicymakerstocorrecttheseinefficienciesislimited.Theproductdifferentiationinherentinmonopolisticcompetitionleadstotheuseofadvertisingandbrandnames.Criticsofadvertisingandbrandnamesarguethatfirmsus

9、ethemtotakeadvantageofconsumerirrationalityandtoreducecompetition.Defendersofadvertisingandbrandnamesarguethatfirmsusethemtoinformconsumersandtocompetemorevigorouslyonpriceandproductquality.CHAPTEROUTLINE:Definitionofmonopolisticcompetition:amarketstructureinwhichmanyfirmssellproductsthataresimilarb

10、utnotidentical.CharacteristicsofMonopolisticCompetitionManySellersProductDifferentiationFreeEntryCompetitionwithDifferentiatedProductsTheMonopolisticallyCompetitiveFirmintheShortRunFigure1Eachfirminmonopolisticcompetitionfacesadownward-slopingdemandcurvebecauseitsproductisdifferentfromthoseofferedby

11、otherfirms.Themonopolisticallycompetitivefirmfollowsthemonopolistsruleformaximizingprofit.Explaintostudentsthatproductdifferentiationgivesthesellerinamonopolisticallycompetitivemarketsomeabilitytocontrolthepriceofitsproduct.Inasense,eachfirmisamonopolyintheproductionoftheirparticularversionoftheprod

12、uct.Thisisreflectedbythefactthatthesefirmsfaceadownward-slopingdemandcurve.Pointoutthatthegraphlookssomethinglikeamonopoly,butthatthedemandthefirmfaceswilllikelybemuchflatter(becauseitwillbemoreelastic).Itchoosestheoutputlevelwheremarginalrevenueisequaltomarginalcost.Itsetsthepriceusingthedemandcurv

13、etoensurethatconsumerswillbuytheamountproduced.Wecandeterminewhetherornotthemonopolisticallycompetitivefirmisearningaprofitorlossbycomparingpriceandaveragetotalcost.IfPATC,thefirmisearningaprofit.IfP皂dFigure1showsthelong-runequilibriuminamonopolisticallycompetitivemarket.Thisequilibriumdiffersfromth

14、atinaperfectlycompetitivemarketbecausepriceexceedsmarginalcostandthefirmdoesntproduceattheminimumpointofaveragetotalcost.2.Advertisingmaymakemarketslesscompetitivebecauseitmanipulatespeoplestastesratherthanbeinginformative.Advertisinggivesconsumerstheperceptionthatthereisagreaterdifferencebetweentwo

15、productsthanreallyexists.Thatmakesthedemandcurveforaproductmoreinelastic,sothefirmsthenchargegreatermarkupsovermarginalcost.However,someadvertisingcouldmakemarketsmorecompetitive,sinceadvertisingisjustonemoremethodofcompetitionbetweenproductsandsinceitsometimesprovidesusefulinformationtoconsumers,al

16、lowingthemtomoreeasilytakeadvantageofpricedifferences.Inaddition,expensiveadvertisingcanbeasignalofquality.Advertisingalsoallowsentry,sinceadvertisingcanbeusedtoinformconsumersaboutanewproduct.Brandnamesmaybebeneficialbecausetheyprovideinformationtoconsumersaboutthequalityofgoods.Theyalsogivefirmsan

17、incentivetomaintainhighquality,sincetheirreputationsareimportant.Butbrandnamesmaybecriticizedbecausetheymaysimplydifferentiateproductsthatarenotreallydifferent,asinthecaseofdrugsthatareidenticalbutthebrand-namedrugsellsatamuchhigherpricethanthegenericdrug.QuestionsforReview1.Thethreeattributesofmono

18、polisticcompetitionare:(1)therearemanysellers;(2)eachsellerproducesaslightlydifferentproduct;and(3)firmscanenterorexitthemarketwithoutrestriction.Monopolisticcompetitionislikemonopolybecausefirmsfaceadownward-slopingdemandcurve,sopriceexceedsmarginalcost.Monopolisticcompetitionislikeperfectcompetiti

19、onbecause,inthelongrun,priceequalsaveragetotalcost,asfreeentryandexitdriveeconomicprofittozero.2.InFigure2,afirmhasdemandcurveDandmarginal-revenuecurveMR.ThefirmismakingprofitsbecauseatquantityQ1,price(P1)isaboveaveragetotalcost(ATC).Thoseprofitsinduceotherfirmstoentertheindus1try,causin1gthedemandc

20、urvetoshifttoDandthemarginalrevenuecurvetoshifttoMR2.TheresultisadeclineinquantitytoQ2,atwhichpointtheprice(P2)equalsaveragetotalcost(ATC),soprofitsarenowzero.QJnuaAaHsooa)9dFigure2Figure3anuaAacr80gdFigure3showsthelong-runequilibriuminamonopolisticallycompetitivemarket.Priceequalsaveragetotalcost.P

21、riceisabovemarginalcost.Since,inequilibrium,priceisabovemarginalcost,amonopolisticcompetitorproducestoolittleoutput.Butthisisahardproblemtosolvebecause:(1)theadministrativeburdenofregulatingthelargenumberofmonopolisticallycompetitivefirmswouldbehigh;and(2)thefirmsareearningzeroeconomicprofits,soforc

22、ingthemtopriceatmarginalcostmeansthatfirmswouldlosemoneyunlessthegovernmentsubsidizedthem.Advertisingmightreduceeconomicwell-beingbecauseitiscostly,manipulatespeoplestastes,andimpedescompetitionbymakingproductsappearmoredifferentthantheyreallyare.Butadvertisingmightincreaseeconomicwell-beingbyprovid

23、ingusefulinformationtoconsumersandfosteringcompetition.Advertisingwithnoapparentinformationalcontentmightconveyinformationtoconsumersifitprovidesasignalofquality.Afirmwontbewillingtospendmuchmoneyadvertisingalow-qualitygood,butwillbewillingtospendsignificantlymoreadvertisingahigh-qualitygood.Thetwob

24、enefitsthatmightarisefromtheexistenceofbrandnamesare:(1)brandnamesprovideconsumersinformationaboutqualitywhenqualitycannotbeeasilyjudgedinadvance;and(2)brandnamesgivefirmsanincentivetomaintainhighqualitytomaintainthereputationoftheirbrandnames.ProblemsandApplications1.a.Themarketfor#2pencilsisperfec

25、tlycompetitivesincepencilsbyanymanufacturerareidenticalandtherearealargenumberofmanufacturers.Themarketforbottledwaterismonopolisticallycompetitivebecauseofconsumersconcernsaboutquality.Asaresult,eachproducerhasaslightlydifferentproduct.2.3.4.Figure4Themarketforcopperisperfectlycompetitive,sinceallc

26、opperisidenticalandtherearealargenumberofproducers.Themarketforlocaltelephoneserviceismonopolisticbecauseitisanaturalmonopolyitischeaperforonefirmtosupplyalltheoutput.Themarketforpeanutbutterismonopolisticallycompetitivebecausedifferentbrandnamesexistwithdifferentqualitycharacteristics.Themarketforl

27、ipstickismonopolisticallycompetitivebecauselipstickfromdifferentfirmsdiffersslightly,buttherearealargenumberoffirmswhocanenterorexitwithoutrestriction.Amonopolisticfirmproducesaproductforwhichtherearenoclosesubstitutes,butamonopolisticallycompetitivefirmproducesaproductthatisonlysomewhatdifferentfro

28、msubstitutegoods.Sothegoodsdifferintermsofthedegreetowhichsubstitutesexist.Monopolisticallycompetitivefirmsdontincreasethequantitytheyproducetolowertheaveragecostofproductionbecausedoingsowouldrequirethemtolowertheirprice.Thelossinrevenuefromthelowerpriceoutweighsthebenefitsofthelowercostofproductio

29、n.Figure4illustratesthemarketforSparkletoothpasteinlong-runequilibrium.TheprofitmaximizinglevelofoutputisQandthepriceisP.Sparklesprofitiszero,sinceatquantityQM,priceequalsaveragetotalcost.TheconsumersurplusfromthepurchaseofSparkletoothpasteisareaA+B.Theefficientlevelofoutputoccurswherethedemandcurve

30、intersectsthemarginal-costcurve,atQC.SothedeadweightlossisareaC,theareaabovemarginalcostandbelowdemand,fromQtoQ.MCIfthegovernmentforcedSparkletoproducetheefficientlevelofoutput,thefirmwouldlosemoneybecauseaveragecostwouldexceedprice,sothefirmwouldshutdown.Ifthathappened,Sparklescustomerswouldearnnoc

31、onsumersurplus.Sinceeachfirminamonopolisticallycompetitivemarketproducesaproductthatisslightlydifferentfromotherproducts,amonopolisticallycompetitivemarkethasalargenumberofproducts.Butwhetherthatnumberisoptimalornotdependsontwokeyexternalities:theproduct-varietyexternalityandthebusiness-stealingexte

32、rnality.Theproduct-varietyexternalityisapositiveexternalitytoconsumersfromtheintroductionofanewproduct.Thebusinessstealingexternalityisanegativeexternalitybecauseotherfirmslosecustomersandprofitsfromtheadditionofanewproduct.Sincetheentrantdoesnttaketheseexternalitiesintoaccountindecidingwhetherornot

33、toenterthemarket,itisntclearwhethertheactualnumberofproductswillbeoptimal,aboveoptimal,orbelowoptimal.BysendingChristmascardstotheircustomers,monopolisticallycompetitivefirmsareadvertisingthemselves.Sincetheyareinapositioninwhichpriceexceedsmarginalcost,theywouldlikemorecustomerstocomein,asshowninFi

34、gure5.Sincetheprice,P,exceedsmarginalcost,MCM,anyadditionalcustomerwhopaystheexistingpriceincreasesthefirmsprofits.Figure5anumAmo:sool).HdIfyouwerethinkingofenteringtheice-creambusiness,youwouldwanttomakeicecreamthatisslightlydifferentfromtheexistingbrands.Bydifferentiatingyourproductfromothers,youg

35、ainsomemarketpower.Manyanswersarepossible.Theanswersshouldexplainthatcommercialsaresociallyusefultotheextentthattheyprovideconsumersinformationabouttheproductordemonstratefromtheexistenceofthecommercialthattheproductisworthadvertising,andthusisnotoflowquality.Commercialsaresociallywastefultotheexten

36、tthattheymanipulatepeoplestastesandtrytomakeproductsseemmoredifferentthantheyreallyare.a.Afamily-ownedrestaurantwouldbemorelikelytoadvertisethanafamily-ownedfarmbecausetheoutputofthefarmissoldinaperfectlycompetitivemarket,inwhichthereisnoreasontoadvertise,whiletheoutputoftherestaurantissoldinamonopo

37、listicallycompetitivemarket.Amanufacturerofcarsismorelikelytoadvertisethanamanufacturerofforkliftsbecausethereislittledifferencebetweendifferentbrandsofindustrialproductslikeforklifts,whiletherearegreaterperceiveddifferencesbetweenconsumerproductslikecars.Thepossiblereturntoadvertisingisgreaterinthecaseofcarsthaninthecaseofforklifts.Acompanythatinventedareliablewatchislikelyt